You Will Lose More Money

So far this year, the S&P 500 has fallen 1% or more on 20 different trading days. On three of those days, it dropped at least 2.5%. That's an index of 500 very large and well-known companies -- not some unknown individual micro-cap stock -- flopping around like a landed fish.

If you're serious about investing for your retirement, you need a strategy to deal with volatility like that. As your portfolio grows, those gut-wrenching days have ever-larger total dollar impacts on your net worth. If you're not prepared for them before they come, it's much harder to stay the course.

A bitter pill
If you manage your money well, large dollar swings in your portfolio should be cause for celebration. After all, if ordinary volatility translates into real changes to your bottom line, it's a sign you've amassed a substantial nest egg.

For instance, assume you earn $51,000 a year ($4,250 per month). If you had a nest egg of only $425,000 on paper, you would have lost at least an entire month's salary 20 times so far this year. And on three separate occasions, you would have seen that month's salary evaporate from a portfolio smaller than $170,000.

While portfolios of this size aren't large enough to let you retire comfortably, they're strong foundations -- and ones you can reach surprisingly quickly, especially if your employer matches your contributions and you earn decent overall returns.

As painful as they may seem, if you build your portfolio wisely, losses of this magnitude won't risk your retirement when (not if) the next sell-off comes.

How do you swallow it?
Aside from the obviously bad idea of not investing at all, you've basically got two options for dealing with market volatility: ride out fluctuations, or diversify out of stocks and into other assets.

It certainly isn't easy to ride out the natural volatility of the stock market. Even on a generally good day in the market, after all, there will always be some losers. For instance, check out what happened to these multibillion-dollar firms on a day when the overall market rose about 0.4%:

Company	Price on 5/13/2008	Price on 5/14/2008	One-Day Change	Market Cap (in Billions)
Royal Bank of Scotland (NYSE: RBS)	$6.75	$6.42	(4.89%)	$67.63
Deere (NYSE: DE)	$90.19	$81.25	(9.91%)	$35.43
Marathon Oil (NYSE: MRO)	$53.50	$52.25	(2.34%)	$37.25
Fluor (NYSE: FLR)	$191.03	$185.47	(2.91%)	$16.43
Luxottica (NYSE: LUX)	$28.80	$28.07	(2.53%)	$12.81
St. Jude Medical (NYSE: STJ)	$41.35	$39.90	(3.51%)	$13.52
EOG Resources (NYSE: EOG)	$138.55	$134.87	(2.66%)	$33.46
S&P 500 -- for reference	1,403.04	1,408.66	0.40%	N/A

The more concentrated your portfolio, the more likely your exposure to one-day drops like these, even if you could (in theory) earn better long-run returns with a portfolio invested 100% in equities.

But you can curb the inevitable volatility by diversifying into other asset classes, like bonds and real estate. Motley Fool Rule Your Retirement advisor Robert Brokamp has suggested these model portfolios based on investors' risk tolerance:

Asset class	Conservative	Moderate	Aggressive
Large-cap stocks	20%	35%	50%
Small-cap stocks	5%	10%	15%
Foreign stocks	5%	5%	10%
Bonds	60%	40%	20%
REITs	10%	10%	5%

Although your long-term rate of return may be lower with a diversified portfolio, it will minimize volatility in the short term, which may be a concern if you're at or close to retirement age.

Preserve your sanity
When you get right down to it, limiting volatility means a slower -- but less risky -- path to retirement. How much slower, though, depends on how you choose to allocate your assets.

Fortunately, you don't have to go it alone. Wherever you are along your path, our team at Rule Your Retirement can help. As seasoned experts in all things retirement, Robert and his team can help you build a strong portfolio to weather all kinds of markets.